The new Base Erosion Profit Sharing (BEPS) 2.0 framework aims to ensure multinational enterprises are paying their fair share of taxes where they operate, and this is expected to have far-reaching impacts on many “tax-friendly” countries and multinational enterprises (MNEs). Member jurisdictions such as Mainland China, Singapore, Hong Kong, India, and Vietnam have agreed to follow the new framework, leaving many to wonder how this will affect the global tax landscape and companies’ tax strategies.
MNEs within the scope of the new international rules—those doing customer-facing businesses and digital service businesses or those above the Country-by-Country Reporting (CbCR) revenue threshold—need to monitor the most recent tax developments and assess how they impact their overall tax burden and the necessity for group restructuring.
Thang Vu, Associate Manager of Tax at Dezan Shira & Associates’ Ho Chi Minh City office, shared updates in a webinar on tax developments in Vietnam and how BEPS 2.0 will affect businesses in Vietnam. Due to the high interest in Vietnam, a few highlights of the webinar are shared in this article.
For an in-depth analysis, readers can view the full webinar.
Can you tell us about the recent tax developments in Vietnam?
Recently, Vietnam brought out new regulations on the enforcement of tax administration and new rules on transfer pricing.
The tax administration regulations, as outlined in Decree 126, mainly affect online traders and those in digital commerce such as Netflix, movie streaming websites, and gaming platforms.
Previously, the government only imposed withholding tax on Vietnamese companies involved with overseas companies.
Now, overseas companies must register to receive a tax identification number and pay taxes on Vietnam-sourced revenue. Tax authorities have also imposed enforcement measures to enforce tax administration on e-commerce activities. Banks are obligated to report on payments made to overseas entities, particularly to foreign contractors and companies. While we are not sure of the consequences levied against companies that do not comply, it’s possible the government may take severe measures like blocking the IP address of the website that flouts the rules. The government is also likely to carry out tax audits and tax inspections of e-commerce entities that do not comply.
The second major development is new rules on transfer pricing regulations. The main purpose of the new regulations is to tighten the arm’s length range from the 35th percentile to the 75th percentile and retrospectively apply it back to the 2020 financial year.
In addition, the net interest deductions, which are net of interest expenses less interest income, are capped at 30%. The Organization for Economic Cooperation and Development (OECD) advises between 10% and 30% rules apply to all local and foreign direct investment (FDI) companies. In fact, FDI companies are subject to more scrutiny than local companies, due to the tax authority’s limited ability to exchange information with other tax jurisdictions.
What’s the impact of BEPS 2.0 on common structures?
To address the BEPS risks arising from the digitalization of the global economy, the OECD issued a statement on 1 July 2021, on reworking the framework for international tax reform.
Commonly referred to as BEPS 2.0, the new framework ensures a fairer distribution of taxing rights is established concerning the profits of large MNEs, and sets a global minimum tax rate.
The BEPS 2.0 package consists of two parts, which is also called the two pillars:
The following are the three types of common structures that may no longer be tax-efficient due to BEPS rules in Vietnam:
Phoenix company—An organization used to exploit certain tax benefits. A Phoenix company is set up to avail tax incentives for a certain amount of time. It is then closed and set up again with the same business structure to obtain time-based taxed incentives such as four years of tax exemption. However, BEPS would make this redundant.
Tax havens—These are jurisdictions that have very low rates of taxation for investors such as Panama. However, with BEPS you would still need to pay taxes in the country where business is conducted. Pillar one of BEPS 2.0 necessitates that MNE groups pay taxes where they have users regardless of commercial presence.
Tax incentive regimes—With BEPS, if a business enjoys tax incentives in Vietnam, they would still be subject to taxes where the parent country is headquartered.
Can you give us an overview of tax incentives in Vietnam?
Vietnam has several tax incentives that appeal to investors. Location-based incentives apply to qualifying economic and high-tech zones, certain industrial zones, and areas with difficult socio-economic conditions. Industry-based incentives are applied to several industries such as education, software, high-technology, renewable energy, and others.
Vietnam also has preferential tax rates such as a flat lifetime tax rate of 10% for socialized projects in certain areas with difficult socio-economic conditions, as well as a flat lifetime tax rate of 15% for agribusinesses.
This article was first published by Vietnam Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to [email protected] for more support.